Assuming The Worst

My belief has been that when push comes to shove the EU would not allow a collapse to occur. I have clearly underestimated how bad the EU would allow the situation to get before acting. If the EU acts forcefully we will be off to the races. However, this post will look at what happens assuming they continue to twiddle their thumbs.

Even during the worst crises there are rallies. The market typically needs to get maximum oversold for a rally to occur during market turmoil. That will occur at the end of the day on Monday. We could be looking at another three down days before a rally by that measure. That said, it is fairly unusual  not to see a bounce before we reach maximum oversold. We have yet to see a bounce during this decline so a bounce is not out of the question before reaching maximum oversold.

I have clearly been wrong by buying into this decline way too early. My plan is to tough it out until we get a bounce at which point I will likely cut positions if the EU still has their thumb up their ...

 

2 comments:

Anonymous said...

do you think there has been a fundamental change in the market, i.e., that we are entering a bear market? that maybe the october rally was a "bull-trap" ? all the indices are trading below their big  MA's and altho there is a lot of hand wringing over the EU situation, there is a lot of complcency on the bull side also

Tsachy Mishal said...

I dont think that the markets future is written in stone. ie If the ECB would have rewarded Italy for passing austerity and putting Monti in power by aggressively buying bonds than the market would be much higher. I think time is running out but it not too late for Europe to act.

The US economy will slow next year as tax breaks and extended unemployment run out and Europe is slowing as well.That is what is scaring me and the worse Europe allows it to get the tougher it will be to overcome this.
That is the reason Im planning on lightening up on the next rally if the EU does nothing. At that point I would only add when we get oversold, the EU acts or valuations are pricing in the worst case.